Blockchain Basics

A blockchain is a shared database, a ledger, that many computers keep in sync without a central owner. Transactions are grouped into blocks, each block is linked to the previous one through cryptography, and the network agrees on which blocks are valid through a consensus mechanism. Once enough blocks are built on top of a transaction, changing it becomes practically impossible. Blockchains are the technology behind Bitcoin, Ethereum and the rest of crypto, and understanding them helps traders read on chain data and assess risks.

The building blocks#

Because each block includes the hash of the previous block, altering an old transaction would change every later block's hash, which the network would reject.

Keys and wallets#

Whoever controls the private key controls the coins. If a key is lost, the coins are usually lost forever; if it is stolen, the thief can move them. "Not your keys, not your coins" is a common saying for this reason.

Consensus mechanisms#

Proof of work's security comes from the cost of electricity and hardware; proof of stake's from the value of staked tokens at risk. See Staking and Restaking.

Confirmations and finality#

Public vs private blockchains#

• Public (permissionless): anyone can read, transact and run a node. Bitcoin and Ethereum.
• Private or permissioned: only approved participants. Used by some companies and banks.

Layers#

• Layer 1: the base blockchain (Bitcoin, Ethereum, Solana).
• Layer 2: networks built on top that process transactions more cheaply and settle back to layer 1, such as the Lightning Network for Bitcoin and rollups for Ethereum. See Ethereum.

What blockchains cannot do alone#

Blockchains cannot see real world data such as prices or sports results on their own. They rely on oracles to bring in outside information, which adds a point of trust and risk. See Oracles.

Why traders should care#

• On chain data reveals flows, holdings and activity. See On-Chain Analytics.
• Fees and congestion affect trading costs on decentralised exchanges.
• Settlement times affect deposits, withdrawals and arbitrage.
• Security model affects the risk of each chain.

Frequently asked questions#

What is a blockchain?#

A shared ledger maintained by many computers, where transactions are grouped into cryptographically linked blocks and agreed on through consensus.

What is the difference between proof of work and proof of stake?#

Proof of work secures the chain through computing power and energy; proof of stake secures it through tokens locked as collateral by validators.

What happens if I lose my private key?#

You usually lose access to your coins permanently, since no central authority can recover them.

Next, learn about dollar tokens in Stablecoins.